O2 UK have never allowed auto setup of pay & go because they don't sell xda machines on pay & go and don't support it.
You can web browse with an O2 pay & go connection, but you can't do pop3 email, MSN or tomtom traffic. You need a contract sim for those.
Here's the settings you need for O2 pay & go.
Start > Settings > Connections > Connections.
Under ‘My Work Network’ tap ‘Add a new modem connection’
In the ‘Enter a name for the connection’ box, enter any name of your choice.
Change the ‘Select a modem’ drop-down box to ‘Cellular Line (GPRS)’
Enter the access point name as payandgo.o2.co.uk
Enter the username as payandgo
Enter the password as password
Tap ‘Proxy Settings tab
Delete the IP address in the Server field and tap OK
In the Service box enter 188.8.131.52
In the Port box enter 8080
Tap OK 4 times to exit